Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, have seen significant increases in open interest over the past few weeks. This happens even when the market is witnessing price stagnation and investors are starting to take a more conservative position in the market. A significant increase in open interest in these two cryptocurrencies could have a significant impact on the entire cryptocurrency market.
Ethereum Soars With Bitcoin
Bitcoin open interest has been on the rise in the past few weeks. led to some interesting predictions for digital assets, and now Ethereum has started following the same trend. Last week, Ethereum open interest relative to market cap surged alongside Bitcoin open interest.
Both digital assets actually hit record highs in this regard, surpassing June 2022 levels. Bitcoin he rose to 3.21% and Ethereum peaked at around 4.24% over the same period. As such, ETH shows even more extreme numbers compared to Bitcoin.
To put this into perspective, since 2019, the open interest to market cap ratio of ETH compared to BTC has always been around 0.46%, indicating a fairly small margin. However, this has changed over the past two years and the gap is only widening.
BTC and ETH open interest reach new ATH | Source: Arcane Research
The Ethereum merge was the main reason for this surge. As interest in the second largest cryptocurrency peaked as the upgrade neared, institutional investors began setting up shop in Ethereum, leading to the large gap we are now observing.
Short squeeze call?
Open interest surges, especially those reaching all-time highs, have always had a significant impact on the crypto markets, even if short-lived. This suggests that it is leading to high and extreme leverage levels.
BTC price settles above $19,000 | Source: BTCUSD on TradingView.com
At levels this high, short squeezes are more likely, but it’s important to keep in mind that they can go either way. Eventually, your leverage level will start to decline. However they ultimately swing, the impact will be equally brutal for the market.
Massive market volatility and instability will be in the order of the day this happens. An established bearish trend and such extreme levels of leverage can be a recipe for disaster.
Featured image from CoinDesk, charts from Arcane Research and TradingView.com
follow Best Owie on Twitter Market insights, updates, the occasional funny tweet…